Investing in shares (I)Another form of investment is in stocks or shares. Each unit of stock is called a share. Each share is a part ownership in the company. If you purchase from the initial share offering your money is used by the company to run its business.

Shares can then be resold on a stock exchange such as the ASX (the Australian Stock Exchange in Sydney). The profits from resale go to the owners of the share, not the company.

Some of the companies profits are divided between the number of shares and distributes to their owners as dividends. Dividends are paid once or twice a year. Once the dividend is declared for a stock who ever owns the stock on that day gets paid the dividend and the stock “goes ex-dividend”.

Investing in shares (II)The price of a share can change continuously during a day. It is effected by supply and demand. At present the proposed tax on mining is affecting the price of shares in mining companies and the oil disaster in the Gulf of Mexico is affecting BP’s share price.

The original share price is called the face value or par value. The current price is called the market value or market price.

Investing in shares can give bigger returns than putting your money in the bank. BUT it can be much riskier, such as the fall in market value in the great depression or recent economic crisis.

There are two ways to ‘make money’ investing in shares. The first is if the shares increase in value andthe second is through dividends (the interest payment)

Investing in shares (III)Two types of shares are preference shares and ordinary shares. Preference shares have their dividends paid first at a fixed rate of return. The dividend on ordinary shares is variable.

The dividend yield is the dividend expressed as a percentage of the shares market value.

100shareper pricemarket

shareper dividendyield Dividend

Stockbrokers are the agents used for buying and selling shares. You can chose an online broker who gives no advise but charges low fees to a full service broker who will advise you on what shares to buy, but charges higher fees.

Example 1Brittany owns 2000 $5 ordinary shares and 1000 $2 preference shares in Springworths. The current price of the ordinary shares is $9·24 and preference shares is $3·17.a) What is the market value of Brittany’s shares?b) The dividend on ordinary shares is 73¢ per share and preference shares is 7% of face value. Calculate Brittany’s total dividend.c) Calculate Brittany’s dividend yield on each type of share.

a) MV = 2000 × $9·24 + 1000 × $3·17= $21 650

b) Div = 2000 × $0·73 + 1000 × $2 × 0·07= 1460 + 140= $1600

100924

73DY

%97DY

100DY MP

Divc)

100173

2070DY

%4.4DY

Ordinary

Preference

Example 2Holly purchased 3000 Matthews Mining shares at $4·73 each with a dividend of 7·8%. She is charge 1·85% brokerage.a) Calculate the total cost of purchasing Holly’s shares?b) 12 months later Holly sells her shares for $5·68 each. Calculate her total earnings after all costs have been paid and rate of return.

a) Shares = 3000 × $4·73= $14 190

Brokerage = 0·0185 × 14 190= $262·52

Total costs = 14 190 + 262·52= $ 14 452·52

Sells = 3000 × $5·68= $17 040

Brokerage = 0·0185 × 17 040 = $315.24Profit = 17 040 − 14 452.52 − 315.24

= 2272·24

100Investment

ProfitReturn

10052.52144

2272.24 72%15

Today’s workExercise 8E

page 280 # 1, 3, 5, 7, 9, 13, 15, 17, 19, 23